Everything you need to know about the Duolingo IPO

What does Duolingo do?

Duolingo is a mobile language-learning app that offers courses in 40 languages. It averaged 40 million monthly average users for the quarter ended March 31, 2021. Around 5% of those users paid for the ad-free Duolingo Plus subscription service. Overall, the Duolingo app has garnered 500 million downloads and stands as the highest-grossing education app on both Google Play and the Apple App Store.

Duolingo's distinguishing advantage is its use of gamification techniques to encourage users to spend more time on its app. The company says it designed its lessons to be "bite-sized, on-demand and fun." It runs thousands of A/B tests on users to optimize engagement, though this product refinement strategy has sometimes alienated users (for more on that and the negging Duolingo owl, see "What could go wrong?" below).

Aside from the core language-learning product, Duolingo also administers English proficiency tests on behalf of corporations and universities. University admissions are the top use, as U.S. schools often require prospective international students to take an English proficiency exam. The Duolingo English Test, priced at $49, was purchased around 344,000 times in 2020.

Duolingo's Financials

Between 2019 and 2020, Duolingo's revenue more than doubled from $70.8 million to $161.7 million. Duolingo Plus was the primary growth driver in this timeframe, as the number of subscriptions rose from 900,000 in 2019 to 1.6 million in 2020. This coincided with a doubling of Duolingo Plus bookings from $72 million in 2019 to $144 million in 2020.

Duolingo has maintained its impressive revenue trajectory in 2021: Revenue for the first three months of 2021 came in at $55.4 million, which was nearly double the $28.1 million generated in the same period for 2020.

Despite the sustained revenue growth, Duolingo hasn't turned a profit. It lost $13.6 million in 2019 and $15.8 million in 2020. Perhaps of greatest concern for investors, those losses seem set to widen as it posted a net loss of $13.5 million for just the first three months in 2021.

But there are attractive economics: Duolingo's cost of revenues is low, leaving the company with a healthy gross profit. Instead, costs come largely from research and development, which represented 45% of total revenue from 2019 and 33% of total revenue from 2020. This includes costs associated with engineering, product development and design. And some variable costs could come down: Duolingo indicates efforts to boost paid user retention beyond a year, which would allow them to pay 15% app store fees to Apple and Google instead of the standard 30%.

What could go wrong?

Three themes stand out from the S-1 risks section: public perception, reliance on mobile app stores and competition.

The S-1 boasts that the Duolingo brand "has become part of pop culture, appearing in internet memes." (How do you do, fellow kids?) It bears mentioning that these memes aren't always positive, particularly as they pertain to some of Duolingo's more aggressive gamification techniques. The Duolingo owl, for instance, has become a cultural icon for its nagging reminders that prompt users to continue their daily learning streaks.

This isn't just making fun of an owl avatar. Duolingo runs the risk of garnering public backlash due to its monetization and engagement strategies.

• Duolingo writes in its S-1 risks section: "Our brand and reputation may be negatively affected by actions we take that are viewed as contrary to that mission, such as features that are only available to Plus subscribers or changes to the free offering that are viewed as undermining how fun or effective the free offering is."
• "Maintaining our brand will depend largely on our ability to continue to provide useful, reliable, trustworthy and innovative products, which we may not do successfully," the company adds.
• So what does this backlash actually look like? In a popular Reddit post on the r/duolingo forum, a fed-up user labeled Duolingo "a sludge of dark patterns designed to foster addictiveness." The post claimed that the company treats users "as disposable guinea pigs for obnoxious A/B testing which prioritizes short-term user conversions over long-term user retention."
• Duolingo also disclosed in its S-1 that over 3,000 higher education programs accept its English exam, including "17 of the top 20 undergraduate programs in the United States according to US News and World Report." However, it warned that "damage to our brand or reputation could also adversely affect educational institutions' willingness to accept the Duolingo English Test."

On the operations side, Duolingo is beholden to app store policies enforced by Apple and Google, including the sizable 30% revenue cut.

• "In 2020, we derived 51% of our revenue and 53% of our total bookings from the Apple App Store, and 19% of our revenue and 20% of our total bookings from the Google Play Store," Duolingo disclosed in the S-1.
• Apple and Google can unilaterally change their app store policies. While a massive change in fee structures is unlikely, Duolingo points to other policies that could impact its operations. It says a platform provider could "add fees associated with access to and use of its platform, alter how we are able to advertise on the platform, change how the personal information of its users is made available to application developers on the platform, limit the use of personal information for advertising purposes, or restrict how users can share information with their friends on the platform or across platforms."

Finally, Duolingo points to the steep competition and low barriers to entry in the language-learning space.

• "We estimate that there are thousands of free mobile applications for language learning; free products are provided in at least 50 languages by private companies, universities and government agencies," the company writes.
• In particular, Duolingo seems worried about the threat of social media companies, Apple or Google entering the market: "Social media and mobile platform competitors could use strong or dominant positions in one or more markets, and ready access to existing large pools of potential users and personal information regarding those users, to gain competitive advantages over us. These may include offering different product features, services or pricing models that users may prefer, which may enable them to acquire and engage users at the expense of our user growth or engagement."

Who Gets Rich?

Here's how Duolingo shares were divvied up as of March 31, 2021:

• NewView Capital Fund controlled 16.3%
• Luis von Ahn, co-founder and CEO of Duolingo, controlled 12.2%
• Severin Hacker, co-founder and CTO of Duolingo, controlled 12.2%
• Union Square Ventures controlled 11.5%
• CapitalG controlled 11.1%
• Kleiner Perkins controlled 8.5%

Note: Those insiders are set to benefit from Duolingo's dual-class share structure. Their Class B shares have 20 votes apiece versus one vote apiece for the Class A shares the public will buy, meaning the founders and their venture backers will have effective control of the company even after it goes public.

What People Are Saying

• "'Duolingo consistently makes me feel like a failure,' my friend Rebecca texted when I joked about the owl's menacing reminders. 'I feel like you could track my depression by looking at my Duolingo history.'" —Culture reporter Morgan Sung in a 2019 Mashable essay titled "Why does the Duolingo owl scare me more than my high school Spanish teacher ever did?"
• "There are more people in the United States learning languages on Duolingo than there are foreign language learners in all U.S. high schools combined, and there are more people learning certain languages on Duolingo, like Irish and Hawaiian, than there are native speakers of those languages worldwide." —Duolingo in its S-1.
• "Most importantly, though, these apps are powerful reminders that learning a new language isn't a part-time job ... The downside is that it can be tempting to gamify the experience, rather than actually learn. On particularly busy days, I've found myself redoing the earliest lessons just to keep my all-important streak going. Which leads to another important lesson: skirting the rules on a self-improvement project hurts no one but yourself." —Writer Eric Ravenscraft in a New York Times "Smarter Living" column exploring what language apps can and can't do.